Against a backdrop of volatility in both the global and the domestic capital markets, the 2019 Novare Hedge Fund Survey has found that, after two successive years of steady decline, the industry assets under management (AUM) increased to R52.8-billion last year, constituting growth of 12% year-on-year.

The survey elicited a record response from more than 70 South African hedge fund managers who collectively manage 130 uniquely mandated hedge funds and represent about 75% of the total hedge fund AUM.

Independent financial services group Novare head of investments Jacobus Brink says the survey found that large asset managers with hedge fund investment capability and AUM of more than R100-billion saw a relatively high growth in hedge fund assets, followed by those with assets between R500-million and R1-billion.

This while equity long-short funds outperformed other strategies and managed to protect capital during market drawdowns. This strategy, nevertheless, experienced a greater loss in assets, reducing its industry weight by 14%.

Novare explains that fixed income strategies maintained absolute returns throughout the period, continuing on its steady path of consistent performance since 2016 and yielding an increase in returns from 15% in 2018 to 19% in 2019.

In general, the industry performance was positive across all categories in terms of asset size and strategies. Large managers with AUM in excess of R2-billion once again posted the highest returns, followed by hedge funds with AUM of between R500-million and R1-billion.

Brink says more capacity is available as the majority of funds are still below their asset peaks seen in prior years. It can be assumed that this is because of the large outflows experienced by the industry from 2017 to 2018.

The emergence of co-investments adds another dimension to hedge fund investing and presents a new and exciting opportunity, especially at 7.2% which is slightly higher than retail allocators.

Novare finds that high-net-worth individuals remain the most significant allocator in the industry.

Meanwhile, a significant development in the domestic hedge fund industry in 2019 was the publication of the Hedge Fund Classification Standard by the Association for Savings and Investment in South Africa.

The standard aims to provide a framework within which hedge fund portfolios with comparable investment objectives and scenarios can be grouped, and to provide a clearer picture of the various strategies offered. 

The survey solicited views from the industry on this development, as well as some of the other recent regulatory interventions, such as the hedge fund industry being included under the regulatory ambit of the Collective Investment Schemes Control Act.

The major concern for the industry is the regulatory prohibition of a collective investment scheme investing in such a hedge fund.

“Interestingly, the hedge fund industry is still poorly understood, as many South African investors perceive hedge funds as riskier than unit trusts when, in fact, the two vehicles have been very similar, since the introduction of hedge fund regulations.